Financial Market Report-GDP Shrinks, Jobless Claims Stay High

October 30, 2008

It’s official: the economy is contracting. U.S. GDP shrunk at an annualized rate of 0.3 percent during 3Q08, mostly as consumers decided that they needed to do less shopping. How long will the contraction continue? It’s anyone’s guess, but if it continues at the current pace through 1Q09, that would be the worst recession since the mid-1970s. At this point, the nation might be lucky if the current slump were merely as bad as the ’70s, and not like that grim period of time nearly 80 years ago that rhymes with “recession.”

Still, the GDP numbers were better than expected–economists in the business of predicting such things had forecast a 0.5 percent contraction. That, or the prospect of interest rate cuts by the European Central Bank and the Bank of Japan later this week, could account for the DJIA’s modest uptick today: 189.7 points, or 2.11 percent. The S&P 500 and the Nasdaq were similarly up today, 2.58 percent and 2.49 percent, respectively..

More grim news out of the economy on the employment front, as the Labor Department reported that jobless claims remained at an elevated level. 479,000 Americans filed for initial unemployment benefits last week, which was about the same as the previous week’s level.

Predicting how the increasingly skittish market will react to any bit of economic news these days is far from a science, but as of early afternoon eastern time, the Dow Jones was up 183 points. Perhaps things have reached the level where news anything less than horrible is greeted with open arms.

How low can the Fed go in the interest-rate limbo dance? One percent’s as low as the key rate has been since early 2004. It has been lower, but not since 1958. Still, there’s talk of another half-point drop when the Fed meets again in December. There’s also talk of zero percent, which is uncharted territory in this country, but which didn’t really work out for the Japanese.

Federal mortgage assistance for homeowners isn’t exactly uncharted territory — the New Deal had a response to that earlier mortgage crisis in the form of the Home Owners’ Loan Corp., which did most of its lending in the darkest days of the Depression. The federal government is again considering assistance to sinking mortgage-holders, though not precisely in the same way. According to the New York Times, “the government would agree to shoulder half of the losses on home loans if mortgage companies agreed to lower borrowers’ monthly payments for at least five years.”

Deutsche Bank has lately let it be known that “we don’t need no stinkin’ bailout,” even posting a third-quarter profit of about 435 million euros ($573 million). But the “profit” was actually something of a sleight-of-hand, since recent accounting rule changes allowed the firm to write down investment losses for the quarter to 1.2 billion euros, instead of posting more than 2 billion-euro writedown.